Baxter Plunges 6% on JPMorgan’s Stealth Downgrade

By Ben Levisohn

JPMorgan might have initiated coverage of Baxter International (BAX) with a Neutral rating, but investors couldn’t help but notice what it actually was–a downgrade.

ZUMAPRESS.com

See, JPMorgan hasn’t been allowed to rate the shares of Baxter International since Dec. 2012, but now that Baxter’s purchase of Gambro is closed, its analysts can. So while they initiated the stock with a Neutral today, they had it rated Outperform before the restriction began, a point its analysts pointed out in the note.

As a result, Baxter’s shares are tumbling today. They’ve dropped 6.1% today, the second worst performer in the S&P 500, and more than its medical-device competitors. Edwards Lifesciences (EW), for intance, has fallen 1.2%, while Becton, Dickinson (BDX) is off 0.4% at 100.70.

One of the big reasons for their muted outlook is competition in the FVIII market, which helps blood clot. Analyst Michael Weinstein and team write:

The FVIII market…is heading into a period of significant disruption, brought on by the introduction of longer-acting products, beginning with Biogen’s (BIIB) Eloctate (rFVIIIFc) in 1H14. The benefit of longer-acting products is debatable and the consensus view, as well as our own until recently, has been that both doctors and patients would be slow to switch. However, a series of calls we recently conducted with leading clinicians, culminating with a survey of 50 hematologists caring for more than 15% of the US market, paints a very different picture…

By 2016 this should look like a very different market. Biogen’s first mover advantage makes Eloctate a disruptive product and, post an expected approval in March 2014, it should start to take significant share. Biogen’s challenge will be to capitalize on this head start ahead of Novo Nordisk’s (NVO) entry, and then ultimately Baxter and Bayer (BAYRY) running 2 years behind. Pricing will be key, as Biogen can’t afford to give payers pause, so the perception has to be that it’s on par, if not more attractive for patients up the age and weight curves. Another question is capacity. If the market moves quickly, will Biogen be in position to take full advantage? Management suggests it will be ready, but is reluctant to say more than that ahead of the launch. We expect we’ll learn more at the company’s hemophilia briefing on Nov. 22.

Why does it matter? FVIII represents about 16% of Baxter’s revenue and as much as 30% of profits, according to JPMorgan. If Weinstein is right, that’s big chunk of Baxter’s business that could be at risk.

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SEPTEMBER 25, 2013 7:46 P.M.

je_md wrote:

This is a good example of a bad analyst opinion (Weinstein not necessarily Levishon). Baxter is fully aligned with Halozyme for subcutaneous delivery of clotting factors. Look at action on Halo which is progressing through study process with advanced trials already showing efficacy for subcutaneous delivery of chemotherapeutics. IV access and associated infectious complications are a significant source of morbidity amongst hemophiliacs and cancer warriors. Once translated to the clotting factor market Baxter will crush Biogen's product before they realize any ROI. Baxter's pipeline is not only strong, it is also well positioned to protect market share. Combine this with an ever increasing footprint in the dialysis market and you get a BUYING OPPORTUNITY with current price action. JP Morgan should consider reassigning this analyst. As far as a replacement goes, sorry not only am I unavailable... you couldn't afford me

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